Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Bear Stearns Grumbles

Bear Stearns reported second-quarter earnings on Thursday.

Given the strong earnings reported by Lehman Brothers (NYSE:LEH) earlier in the week, I thought there was a fair chance that Bear Stearns (NYSE:BSC) could use strength in areas outside of fixed income to kick out that residential-mortgage bear.

No such luck.

All three of the bulge bracket investment banks that have reported second-quarter earnings so far have felt the sting of the downturn in the residential mortgage market, particularly on the subprime end. Like the other banks, Bear makes money from the mortgage market through activities such as trading, principal investing, and securitizations. The turmoil in the market likely hurt the volume of business that Bear was given by its customers, as well as some proprietary investments that the firm made.

Bear, like Goldman Sachs (NYSE:GS), was unable to match the strong results outside of fixed income that allowed Lehman to report significant growth in both revenue and earnings. Revenue from equity-related activities was down slightly from 2006, though the firm attributed this to a tough comparison period because of gains from the NYSE (NYSE:NYX) IPO. Investment banking, the smallest business group in the capital markets segment, had a strong quarter thanks to the merger and acquisition environment and LBO deals, but it wasn't enough to carry the rest of the capital markets activities.

The wealth management division provided some silver lining for Bear's quarter. Revenue for the segment was up 123% year over year, thanks to great results from the firm's asset management operations. Asset management revenue increased from $23 million to $184 million as assets under management (AUM) increased to $60 billion. Though Bear's total AUM pales in comparison to, say, Goldman's, the firm attributed strength in the segment to higher performance fees and investment performance, an area that some of Goldman's funds have been struggling with lately.

For the quarter, Bear's percent of revenue spent on compensation crept up slightly, and non-compensation expenses were up significantly. Even without a $227 million charge the firm took for its specialist trading subsidiary, Bear's pretax margin declined to 30.7% for the quarter from 33.4% in the prior year.

Wall Street estimates prior to this earnings release showed Bear's earnings sliding further sequentially next quarter. While the absence of any special charges will help, the strength of the business environment, and in particular the recovery of the residential mortgage market, will likely have the final say in what Bear can show us three months from now.

NYSE Group is a Motley Fool Rule Breakers recommendation. Fool co-founder David Gardner and his team are always keeping their eyes out for groundbreaking companies. Full access to Rule Breakers is free for 30 days.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...